One type of fund that didn't beat inflation last year: TIPS

If you’re an investor, one of your goals is to beat inflation. Happily, most types of mutual funds did just that in the past 12 months – except for funds that invest in Treasury Inflation Protected Securities, or TIPs.

The Consumer Price Index, the government’s main gauge of inflation, gained 1.5% in the 12 months that ended in March, according to the Bureau of Labor Statistics. This is the so-called headline CPI, which includes food and energy. The average TIPS fund, however, lost 5.8%, according to Lipper.

The fault is not with TIPS. The government-backed securities pay a small rate of interest. But government adds to the bond’s principal an amount equal to the increase in the CPI, and interest is paid on that amount.

TIPS are still bonds, and bonds are sensitive to interest rates – especially rising interest rates. When rates rise, bond prices fall, and vice versa. One year ago, the bellwether 10-year T-note yielded 1.67%. Today, it yields almost a percentage point more – and that has hurt TIPS prices.

Unlike individual bondholders, who can hang on to their bond until it matures and not lose money, TIPS funds have to value their holdings every day at the current market price – so they can’t be shielded from the impact of rising rates.

In the long run, TIPS funds have fared well – in part because interest rates have fallen. The average TIPS fund has gained 3.97% a year the past decade vs. 2.35% for the CPI.